Inflation and Unemployment
Read this chapter to examine the relationship between inflation and unemployment. As you will see, while there have been some periods in which a trade-off exists between inflation and unemployment, there are also periods in which such clear-cut negative relationship between these variables falls apart. The chapter offers some explanations for these variable behaviors and the stabilization policies that are used to address undesirable trends in the variables.
1. Relating Inflation and Unemployment
Try It
Suppose an economy has experienced the rates of inflation and of unemployment shown below. Plot these data graphically in a grid with the inflation rate on the vertical axis and the unemployment rate on the horizontal axis. Identify the periods during which the economy experienced each of the three phases of the inflation-unemployment cycle identified in the text.
| Period | Unemployment Rate (%) | Inflation Rate (%) |
|---|---|---|
| 1 | 2.5 | 6.3 |
| 2 | 2.6 | 5.9 |
| 3 | 2.8 | 4.8 |
| 4 | 4.7 | 4.1 |
| 5 | 4.9 | 5.0 |
| 6 | 5.0 | 6.1 |
| 7 | 4.5 | 5.7 |
| 8 | 4.0 | 5.1 |